BUCHAREST: Romania's central bank shaved another quarter point off its benchmark interest rate to a record low of 2.00 percent on Tuesday, with weak inflation expanding its room to ease.
The move had been expected. Polish, Hungarian and Serbian policymakers also cut their rates earlier this month due to low inflation and the European Central Bank's bond buying, which encourages investors to seek higher yields elsewhere in Europe.
But the prospect of pending interest rate hikes in the United States may put an end to easing in the region.
In Romania, inflation stood at 0.4 percent on the year in February, sharply below the central bank's 1.5-3.5 percent target range. Most analysts polled by Reuters earlier this month said they expected borrowing costs to bottom out at 2 percent.
However, government plans to cut all major taxes during 2016-2019 and even bring forward a value added tax cut to June could fuel deflation.
On Monday, the European Union state's fiscal watchdog said the planned cuts were based on overly optimistic revenue estimates and raised risks of damaging state finances, echoing earlier comments from the International Monetary Fund, which leads Romania's 4 billion euro ($4.3 billion) aid package.
"In an already booming consumption environment ... expected to remain solid as the labour market improves, the fiscal stimulus increases external vulnerabilities versus peers in the context of the Fed tightening cycle," ING said in a research note.
"While we do not see key rate changes until early 2017, we expect the central bank to gradually tighten liquidity control and steer short-term rates in late-2015/early-2016 to counteract demand-side inflationary pressures from the fiscal side."
On Tuesday, the bank also narrowed the corridor of its standing facility, cutting the rate at which it lends to commercial banks by half a percentage point to 3.75 percent. It left its deposit rate at 0.25 percent.
Governor Mugur Isarescu will give details about the decision in a news briefing at 1300 GMT.
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